The Overnight Report: Witch Hunt

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This story features NINE ENTERTAINMENT CO. HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: NEC
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down -14 points or -0.1% while the S&P lost -0.2% to 2432 as the Nasdaq lost -0.5%.

Volatility

Yesterday’s big sell-off in the local market following two surprisingly strong sessions only strengthens my suspicions that high-frequency day trading is exacerbating volatility but more specifically, in the case of this week, yesterday’s expiry of June SPI futures and ASX index options played a big part.

The banks were sold down -1.6% yesterday after two strong days of rallies. Again we must ask, what has changed? A Senate inquiry into the bank levy is underway which could prove beneficial to the Big Five (sunset clause, levy extended to foreign banks) but cannot make things any worse. Yesterday’s strong jobs numbers should help alleviate fears around stretched mortgage holders being unable to meet their payments. So why down again?

Energy fell -2.2% and at least here we can point to the WTI oil price dropping -3% and breaking down through US$45/bbl. But there is little justification for a sudden -2.5% dump in materials, and specifically the big iron ore miners, when the iron ore price was actually up on the day and the materials sector did not much participate in the previous two-day surge.

Healthcare (-1.0%) was the other big mover after two solid days of gains. Suddenly that was on the nose as well. The banks, the big miners and the likes of CSL are all big market cap names that have a heavy influence in the index and subsequently the futures. At expiry time, volatility begets volatility. If this is the real issue here, today’s session might provide further insight, that is, we might have a calmer day. And it’s a Friday.

Among individual names, Bellamy’s ((BAL)) starred with a 15% gain following its capital raising which, long-story-short, should lead to Chinese accreditation. Bellamy’s is 10% shorted. But also close to 10% shorted is Nine Entertainment ((NEC)), which jumped on Wednesday when Ten went in administration and reversed -5.5% yesterday when someone pointed out the loss of Ten is hardly going to make much difference in the highly competitive media space.

Investors continued to bail out of lithium miner Galaxy Resources ((GXY)) as the trickle became a flood since everyone shifted into Mineral Resources ((MIN)) earlier in the week. Galaxy lost another -11.7% while Orocobre ((ORE)) lost -5.2%. Orocobre is 20% shorted.

On those jobs numbers, it seems economists have stopped shaking their heads in cynical disbelief as yet again strong data were released for May. Indeed, and assuming ABS accuracy, every box was ticked.

Net jobs rose 42,000 when 10,000 was expected. For the third month running, all the growth was in full-time jobs at the expense of part-time. The unemployment rate dropped to 5.5% from 5.7% despite the participation rate rising. The underemployment rate fell. And average hours worked rose. CBA’s economists summed up the mood:

“Indicators of the labour market have all moved in the right direction.  While there have been some doubts about the accuracy of the ABS employment data in recent months we think that the fact that we have had three very solid outcomes is a good sign that conditions have firmed.”

Great news for Mal and ScoMo. The question now is as to whether labour market strength can translate into actual wage inflation. So far that hasn’t been the case.

Ongoing

The Dow fell over -100 points early in last night’s session and suggestions are that news special counsel Robert Mueller is investigating one Mr Trump likely fuelled the nervousness. But as has been the case this week, early weakness gave way to later buying and the Dow closed down only modestly.

The feature of this week has been the sell-off in Big Tech, but for one brief day’s bounce. That theme continued last night and at this stage does not look like abating in a hurry. Snap, which shot up like a rocket on listing, is now back at its IPO price. FANG & Co continue to head south.

A month or so ago we saw the Nasdaq, and subsequently the S&P, hitting all-time highs as the Dow lagged behind. Now the opposite is playing out. Investors are taking profits in Big Tech and rotating back into those previously underperforming big cap names that the Dow represents. Small caps are not feeling the love. The Russell has been falling alongside the Nasdaq.

The Russia thing will continue to play out and while it may spark short-term fears, clearly most investors are prepared to shrug it off. Once again the question has been asked: What’s the worst possible outcome? Trump is impeached and Pence takes over? That’s a good outcome.

Energy was once again a drag on the market as the oil price continued to slip and is now threatening technical support levels. Financials continue to find fresh buying on the strength of the Fed rate hike and the more hawkish tone than expected. There’s a lot of rotation going on but once again, as the world awaits any sort of movement on policy from the Trump camp, Wall Street is not really going anywhere as a whole.

In economic news, US industrial production disappointed with a flat result in May. Economists had forecast only a 0.1% rise and the flat result follows the shock 1.1% surge in production in April. And the Fed has already made its position clear.

That position appeared to gain more traction last night as the US dollar index jumped 0.6% to 97.45. This is despite strength in the pound, which came about following a Bank of England policy meeting which saw the vote narrowly split before rates were left unchanged.

Commodities

West Texas crude is down another -US43c at US$44.25/bbl.

Stand-out moves for base metals last night were a -0.7% fall in aluminium and a -1.2% fall in nickel.

Iron ore rose US20c to US$53.70/t.

The strong greenback had gold down another -US$6.40 at US$1253.70/oz.

It also impacted on the Aussie, which had initially shot up on the strong jobs numbers. This morning it’s a little lower over 24 hours at US$0.7581.

Today

The SPI Overnight, which has now rolled into the September contract, closed up 19 points or 0.3%. Will the dust settle today?

It’s Wall Street’s turn tonight, with its own derivative expiry session infamously known as “quadruple witching”.

The Bank of Japan will hold a policy meeting today.

Goodman Group ((GMG)) will host an investor day.

Rudi will connect with Sky Business via Skype to discuss broker moves at around 11.15am.
 

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